"There's one mistake that they all make, and that mistake is listening to their customers"

At the start of this year, many would have chosen Microsoft as the early leader going into the next generation. Nintendo was struggling to gather momentum with the Wii U, Sony was struggling to keep its console business in the black, and yet Microsoft was enjoying dominance and profitability, month after month, in both retail and online. When predicting the balance of power in the next generation, Xbox would have seemed to be the smartest bet. But if you asked the same people the same question today, the answer might well be different.

So who will lead in the next generation? It's a question that Jesse Schell - the prominent game designer and author, and the founder of Schell Games - has spent a great deal of time contemplating, and it is the focus of his hour-long presentation at Barcelona's Gamelab conference: 'Technology + Psychology = Destiny'.

"When people make bad predictions about technology, it's not because they don't understand technology - it's because they don't understand psychology"

"The answer's not obvious," he says when we meet after his talk. "Last time round, there were people who picked PlayStation 3, and that was wrong - very wrong. But when people make bad predictions about what happens with technology, it's not because they don't understand technology - it's because they don't understand psychology.

"If you understand the technology and you understand the human mind, you can predict the future. You can tell what is going to happen."

According to Schell, this is at the root of Microsoft's mistakes with the Xbox One. It understood the needs of its partners, and its own needs as a business, but it badly misjudged the psychology of its customers. It is the classic innovator's dilemma: the market will change, and the customer will respond positively to that change, but the customer won't necessarily allow the current leader to be the one to make that change happen.

"Your customers want you to stay the same, even if it drives you into the ground," Schell says. "Somehow, Microsoft didn't seem to think that would be a reality, or even a problem.

"The reality is that they can't do what the customers want. Basically, Microsoft said, 'We're going to be Steam. You like Steam, don't you?' And we all said, 'No, we hate that. We hate you. You're an idiot to do that.'

"They came out and said, 'We're gonna do this new thing.' And the customers said, 'No, we don't want that, we hate that' - even though it's what they really want and what they will ultimately buy. So now Microsoft has had to say they won't do all that stuff, but someone will.

"our customers want you to stay the same, even if it drives you into the ground"

"That's how it always goes. This is the lesson of the innovator's dilemma. Why is it that big companies fail when the technology changes? It happens in every industry, so what's the pattern? What are they all doing wrong? Everyone says, 'Oh, it's because they're stupid. Big companies are stupid.' They can't be stupid. How did they get that big and stay that big if they're stupid? Microsoft isn't stupid.

"There's one mistake that they all make, and that mistake is listening to their customers."

But that's precisely what Microsoft has done. In the last few weeks, it has altered or removed almost every feature of the Xbox One that truly distinguished it from both its competitors and the current generation of hardware. Microsoft wanted to demonstrate boldness in the face of a rapidly changing market, but it did too much, too soon and with too heavy a hand. The problem for Microsoft, Schell explains, is that while the subsequent outcry came from a relatively small section of the gaming audience, it is nevertheless impossible to ignore. Microsoft may prove to be correct about what a console needs to be in the digital world, but that's irrelevant when it comes to the psychology of the consumer.

"The problem is that the hardcore folks always want the same thing: 'We want exactly what you gave us before, but it has to be completely different.'

"When you want to do something really different - the solution to the innovator's dilemma - you can't take your big brand and say it's going to be completely different. You need to set up something up on the side, and big companies are hesitant to do that. It's how Valve could do it [with Steam], because they had nothing before.

"The thing that's going to make the biggest difference in the next four years is that someone's going to come out with a great gaming tablet"

"I suspect that we're going to end up in that world. Are we going to end up there on these consoles? I don't know. It could be that some dark horse shows up. It could be that Apple shows up. It could be that somebody finds a better way."

And if Schell is sure of one thing, it's that the console companies are in need of a better way. The PlayStation 3 and the the Xbox 360 launched before iOS, before the explosion of casual games on social networks and smartphones, before the emergence of free-to-play as a force in Europe and North America, and at the shallow end of Steam's trajectory as the dominant power in PC gaming. These new consoles are Microsoft and Sony's first real opportunity to respond to those changes, and yet E3 and the events that followed left Schell feeling less than confident in their direction.

"E3 convinced me that they are going to be struggling," he says. "I haven't seen anything that made me think, 'Yeah, you're gonna get that market share back.' I'm convinced that all [of the consoles] are going to have a gradually eroding market share over the coming years. Because tablets are going to be eating their lunch more and more, and other platforms are going to start to take off and catch fire.

"The thing that's going to make the biggest difference in the next four years, say, is that someone's going to come out with a great gaming tablet - a really grade-A tablet for games. Exactly what that means I don't know; I suspect it has a separate hand controller, and I'm sure that it connects up to your TV no problem. I don't know who's going to make that, but it doesn't smell like Microsoft, Sony or..... well, maybe, who knows what Nintendo has up its sleeve, right?"

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It doesn't seem accurate to say Microsoft wanted to be Steam. Unless you ignore differences in pricing, distribution models, online requirements, consumer market, product longevity etc.
If they had wanted to replicate Steam's model, discs should have been done away with entirely in favour of vastly cheaper digital distribution. But the market turnover for console gaming is different than PC gaming. Many don't hold on to their collections.
Nor is it so easy to predict the reaction of the consumer base. Mr Schell, you've said it yourself, the reaction to the X1's features was negative, but now that Microsoft has reversed their position, they are met with apathy when compared with their all too similar competitor. Would celebration not have been the expected response?
It is possible that a similar set of features will become standard in the future, but it isn't viable at the present.
The Dreamcast was released with online capabilities that never gained popularity outside of Japan, but now online modes are a basic consideration of almost every AAA title. Even now some people struggle to maintain consistent connections in online gaming. With connection speeds considerably faster than 56k dial up. It wasn't viable for many people.
Lastly, how you believe that big companies can't be "stupid" is beyond me. Sorry for going for the cliched example, but the world has just faced one of the most significant economic crises since the Great Depression. It didn't happen because big companies were too clever.

I sure wish Apple would show up. I'm not sure they have the profile for being a games console producer right now, but they have the tech and they have the money so it's not beyond the pale.

If Apple did go this route, I'm convinced they'd throw their self-publishing door wide open, as they've already done with phones and tablets, because they know how much better that is for both them and their customers. This would then make the other two stalwarts look pretty foolish and be forced to follow.

And lets not forget, neither of the current leaders came from a gaming background. The console space was once dominated by "proper" game companies, but are now dominated by an operating system and office products manufacturer and a music company. In fact if you look at Sony's history, you'd draw more parallels with Apple than say Sega.

David, they were indeed heading towards Steam's model. They kept discs for two good reasons: 1) because a significant part of the console market doesn't have terribly good Internet connectivity for multi-gigabyte downloads, and 2) to keep retailers happy, as well as those who like to buy physical objects.

Moving towards a Steam-like model was not a problem. There are all sorts of advantages to that. The problem was in selling it to the consumers, where they just flat-out totally failed.

First, they did a horrible job of selling the advantages of a Steam-like system, such as being able to play your game anywhere you can log in, never having to worry about scratched discs, and being able to lend games to friends without having to ship media around, and the like. All we heard about were the disadvantages of the system, not the advantages.

Second, I think it's a big mistake to force such a large change in model on to consumers; they should have made it optional. It would not have been hard to do. Put a serial number on every disc, and give the owner the option to leave it as an "insert to play" disc, or transfer the game to his account where he can use it (and download it) anywhere he can log in. The disc then becomes unplayable. Sure, you won't be able to stop people who never connect their box to the Internet from playing the used disc anyway (since you can't check that the serial number hasn't been used), but given how few people never, ever connect their boxes to the net, this is a small price to pay.

Sony's had Steam-like service running in parallel with their regular disc games for a couple of years now. (It's just under two years ago now that I bought the Borderlands Full Bundle from PSN, which was exactly the same content as the disc-based game.) These days most major releases are "Day One Digital"--available digitally in account-locked versions on the same day you can buy the disc. Many consumers clearly accept this model; MS really just had to deal properly with the ones that didn't, and it appears they couldn't do that.

MS may be listening too hard to end users now, they got into this mess by listening to all the wrong people (industry with vested interests) and completely ignoring the gaming public. No listening and no talking to them... precious little talking at them even.

Listening to customers too much will absolutely evolve you into a dead end. Not listening enough is gambling and you'd better have a damn good product to back that gamble. XBone clearly isn't that damn good product, being barely distinguishable from its competition and the software features didn't change that perception. Features that could have been introduced in parallel and the market trusted to drive adoption, hedging their bet. Of course that would let Sony react, it is just software and servers after all and MS doesn't like sharing markets.

Unfortunately for Microsoft it's overall business is so far down the crapper they're in a gambling mood but still clinging onto the mistaken belief they control the market, they can still tell customers what they want. Reality just smacked them hard and 'plan B' is 'panic, panic hard, panic long, keep on panicking till the world magically changes around you'. Couldn't happen to more deserving convicted monopolists ;)

Dont listen to your customers? my god really?
anyway the problem microsoft has/had with the xbone is not some secret, it will happen to any successful company/product if you arent careful. If you are successful as a company its because consumers like your product, so as you begin to change your product, to upgrade it, you have to be careful to do it slowly and by never taking away features ( if possible) but rather just add new features. Microsoft was too quick do away with legacy features that consumers have learned to like, become familiar with, and expect. That was the problem. If microsoft wants to add new tech and deliveries services above and beyond the old tried and true methods, then people are not going to protest. If indeed the new tech is better, people will adapt, accept, and embrace it. If they do not like the new tech at least they can simply ignore it and still remain happy paying customers.

If microsoft would just understand this they wouldnt have had the uproar over the xbone or even windows 8.

Heh. This reminds me of an overheard conversation from back when I worked doing illustrations for a kid's clothing company where one of the execs decided buttons and laces were "out" and he wanted a line with not a single button or hand-tie - just zippers, snaps, velcro or anything "futuristic"

Choice matters, people. Even if you KNOW you have a good idea, you can't bring your consumers along by taking away any choices they had previously just because you think they'll all embrace that master plan.

Interesting article. The classic case of a company introducing a revolutionary product as a side offering has to be the Nintendo DS.

Consumers weren't complaining about the Xbox One shifting towards being a digital platform "like Steam" though, they were complaining about restrictions that go beyond any currently successful digital platform, like always-on DRM and unfair restrictions on transfering licenses.

There are probably already decent gaming tablets, but a successful gaming platform is more than just a good technical spec.

I find this hard to agree with because I still feel the problem wasn't the proposed changes by themselves. It was the proposed changes thrust on the public without any real evidence of why this would be a benefit to them AND on a console costing far more than its apparently more powerful rival.

Cost alone was always going to make people wary - the rest just tipped them across into the 'not a chance' brigade.

Basically, Microsoft said, 'We're going to be Steam. You like Steam, don't you?' And we all said, 'No, we hate that. We hate you. You're an idiot to do that.'

Thats how I initially saw it as well. But the problem with that is pretty obvious: going from the current 360 set up to the proposed initial set up of the XB1 was just too radical of a change for most people. Let's face it, you're never going to win any new fans for taking away or restricting used games, outside of those who make games. And that was just the start of their problems

It's nice that they listened in the end and started making all of these changes but why weren't they listened when building this system? I've been an XBL rewards member for the last 2+ years and have taken a monthly survey all 24+ months I've been enrolled. I can't recall a single question about features/capabilities I would have liked to see in the 360's successor and that in itself is another problem. They should have been asking the gamers that currently support them what they think of their controversial changes they had in store before they decided to give them the green light. Hopefully they learned their lesson from all of this.

"Your customers want you to stay the same, even if it drives you into the ground," Schell says.

But this isn't Microsoft or Sony's problem in the console market. In Clayton Christensen's disruptive innovation theory:

Low-end disruption can occur when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the performance of the product overshoots the needs of certain customer segments.

Why are console players... console players? Because they don't place the same value on hardware, processing speed and graphics as core PC players. They are willing to trade off power, speed and graphic quality for ease of use, no maintenance and lower cost. If MS and Sony hadn't lost sight of this very simple truth, they would have understood there was a much greater demand for innovative / evolutionary type games and experiences than for 10x more powerful hardware, processing speed or additional non-game related features. The inability to reconcile internal goals with market realities is what will ultimately drive MS and Sony into the ground.

What are they all doing wrong? Everyone says, 'Oh, it's because they're stupid. Big companies are stupid.' They can't be stupid. How did they get that big and stay that big if they're stupid? Microsoft isn't stupid.

And Microsoft got and stayed that big by free-riding the company's early success, decades of anti-competitive business practices, massive marketing budgets for poorly conceived or derivative products and services, consumer complacency and most recently, becoming the primary beneficiary of Sony's console market mistakes.

Smugness and a lead in any horse race often breeds stupidity in a few forms. When no one is around to question your next move (and you're too full of yourself to listen to suggestions anyway), yeah, stuff happens.

Unfortunately for Schell, business isn't as simple as learning a set of commandments, as for every instance of a company listening to its customers and failing there are many instances of companies listening to their customers and succeeding. The challenge for companies is always to be able to work out when they should listen and when to ignore.
If anything, the problem for Microsoft in this instance has been one of poor communication, they have taken a bunch of features which sound fairly reasonable but have managed bring them across in a way that makes them sound like a great Satan to gamers.

Its the only 'games design' book I recommend to my designers. Its head and shoulders above anything else I've read.

Gareth, is there anything in there about not making your otherwise excellent kart racing sequel that stars a popular kids' character way too tough for kids and even many adults? I ask for no particular reason.